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Citi Admits The Truth: "If The Market Drops 10%, The Fed Will Most Likely Not Hike"

Tyler Durden's picture




 

Back in April, when Bill Dudley first admitted that the Fed's rate hike will be "shaped party by the market reaction", we first coined the term Dow Data Dependent. Some mocked this assessment, but 5 months later it has proven to be spot on, following Bill Dudley's repeat appearance in which he cautioned that a September liftoff looks "less compelling", catalyzing the biggest two-day surge in the Dow Jones in history. Today, Citi admits that the "Dow" is precisely the only "data" point that the Fed cares about.

From Citi's rates strategist, Jabaz Mathai:

All the components for the US growth index have been reasonably strong over the last few months, and this was reinforced by the higher than expected revised second quarter GDP estimate released yesterday (3.7% vs. a Bloomberg median survey estimate of 3.3%). On the other hand, the global growth index is treading water. The Fed has to decide whether to hike based on domestic economic strength and the unsuitability of zero rates and super accommodative policy in the context of current growth or to hold back to better understand the disinflationary impact of slower external growth.

 

The market has already delivered its verdict swiftly in the face of the global equity market correction– reducing substantially the probability of a rate hike in September, and pricing in a full rate hike only by March next year. We assign a higher probability than the market for a lift off in September but acknowledge that the risk has shifted towards later, a slower pace and a lower terminal rate. For now, we hold on to the put on EDU5 that we initiated two weeks ago.

 

"Data dependency” over the next couple of weeks might really mean “equity market dependency”. If the equity market drops 10%, the Fed will most likely not hike, no matter what the payrolls data is.

And there you have it: the "smartest central planners in the room" are nothing more than hostages to the "market" they created, a "market" which without explicit Fed support will tumble. In other words, the higher the market rises, the more likely the Fed will proceed with the rate hike which slams it right back down. And vice versa. It is no wonder air conditioners in the data centers housing the US algos farms and dark pools are overheating - not even the HFTs can make much sense of this particular circular logic.

 

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Mon, 08/31/2015 - 08:07 | 6489565 overmedicatedun...
overmedicatedundersexed's picture

citi much like winthorp has set the price to buy at -10% is the buy point. "turn those machines back on"

Mon, 08/31/2015 - 08:12 | 6489579 CrazyCooter
CrazyCooter's picture

They can't normalize rates so they can't hike. I am soooo tired of them saying, "OMG, We are gonna hike! We really mean it!" ad nauseum.

Regards,

Cooter

Mon, 08/31/2015 - 08:21 | 6489604 Headbanger
Headbanger's picture

FUCKING BULLSHIT!

THE FERAL RESERVE WILL RAISE RATES SOON NO MATTER WHAT

Citi is just trying to stop massive epic biblical outflows from its Muppet accounts.

Mon, 08/31/2015 - 08:24 | 6489613 CrazyCooter
CrazyCooter's picture

Raise rates or normalize rates? .1% ain't exactly .5%.

QE4 will be on deck as soon as China keeps dumping treasuries to stablize their peg.

Technically if they didn't do anything, it is tightening, as they have issues mature and do not roll them.

Regards,

Cooter

Mon, 08/31/2015 - 08:27 | 6489618 Winston Churchill
Winston Churchill's picture

Its a geopolitical imperative.Rates will rise anyway because of UST liquidations.

They are front running that rise to appear still in control.

Mon, 08/31/2015 - 09:12 | 6489749 Gilnut
Gilnut's picture

Spot on HB.

 

It's going to become all about the Bond Market.  Bonds are the foundation of the entire ponzi scheme, you bet your ASS they will raise rates soon to keep that market afloat.

 

Watch. The. Fucking. Bond. Market. Period........everything else is just noise.

Mon, 08/31/2015 - 08:22 | 6489608 SheepRevolution
SheepRevolution's picture

If the markets drop 10%, it will drop at least 50% more and there will be no rate hike.

If it doesn't drop 10%, they might raise the interest rate a tiny, tiny little bit which would make the stock market drop at least 10%.

Both ways, they loose.

Mon, 08/31/2015 - 08:44 | 6489665 ramgold2206
ramgold2206's picture

@sheepRevolution... agree, except "they" never lose...

 

www.teamramgold.com/about-us

Mon, 08/31/2015 - 08:08 | 6489567 JustObserving
JustObserving's picture

Should they not be saying that Fed will do QE4 if the market falls 10%?

The only thing sustaining the hollowed out US economy is the wealth effect from the stock market.

Mon, 08/31/2015 - 08:14 | 6489587 CrazyCooter
CrazyCooter's picture

The economy is in a depression. Holders of assets like bonds and stocks are in a bubble and don't seem to notice ... yet. If it actually goes tits up and yields head north and/or the market truly corrects to historic value ranges, then a good chunk of the "rich" will be on board with the depression.

Regards,

Cooter

Mon, 08/31/2015 - 08:08 | 6489568 Budnacho
Budnacho's picture

Oh Im sure this will all end well.....

Mon, 08/31/2015 - 08:08 | 6489569 JamaicaJim
JamaicaJim's picture

A fucking .25% - QUARTER OF ONE PERCENT.....and these fucks have the whole world on a string....

 

WHAT A BUNCH OF CUNTS...

Mon, 08/31/2015 - 08:16 | 6489592 CrazyCooter
CrazyCooter's picture

For a while I was thinking they might hike some really small amount (like .1% or whatever), but then I realized that would be admiting they can't hike.

Right now, they can't hike, but they have to desperately pretend they can hike because desperately pretend (i.e. jawboning) is the only monetary policy tool they got left ... other than the big, shiny red button.

Regards,

Cooter

Mon, 08/31/2015 - 08:11 | 6489576 blindman
blindman's picture

Run on Silver Developing As Demand EXPLODES!
Posted on August 30, 2015 by The Doc
http://www.silverdoctors.com/run-on-silver-developing-as-demand-explodes/

Mon, 08/31/2015 - 08:26 | 6489611 falak pema
falak pema's picture

Mr Buiter and Citi are they now advocating QE infinity, not very subtly, as the ONLY solution to avoid  the market predicament of precocious ejaculation of deadly deflation ?

TINA calling !

The fizz goes out with a pop! What a way to lose a boner!

When you can't hike you get on your bike and ride and ride the print machine like on an alpine climb. Painful. Citi has a lot to lose as it is a TBTF club member who already got pumped on free hand outs by the tax payer for having pumped the market on steroids in the period leading to Lehman's ejaculative demise.

Apocalypse's deadly sex toy, runaway algo robot, is now the print machine.

Mon, 08/31/2015 - 08:24 | 6489614 MATA HAIRY
MATA HAIRY's picture

the more money the Fed bankers make for the wall st hoodlums, the higher the speaking fees for the fed bankers once they retire...and who do you think is going to pay those speaking fees?

 

Quid pro quo, much?

Mon, 08/31/2015 - 08:26 | 6489617 GOSPLAN HERO
GOSPLAN HERO's picture

Montrose - Paper Money (1974)

https://www.youtube.com/watch?v=x0uQ9SajO8I

Mon, 08/31/2015 - 08:30 | 6489626 T-NUTZ
T-NUTZ's picture

In other words Citi is short and we will see a 10% drop before the next FOMC meeting.  At which point Citi will be long...

ah it's good to be the King!

 

 

Mon, 08/31/2015 - 08:30 | 6489628 Rodders75
Rodders75's picture

Raoul Pal says that the rise in USD is already equivalent to a 200bp tightening. Marc Faber thinks the Chinese deval was rigged by the central banks to give an excuse to Yellen not to raise rates citing GEM instability. Fed will not raise rates. Period. 

Mon, 08/31/2015 - 08:31 | 6489634 Mr. Bones
Mr. Bones's picture

We assign a higher probability than the market for a lift off in September 

Correct me if I'm wrong, but isn't this the liftoff we were instructed to expect during "Recovery Summer 2010" ...and '11, '12, '13, and '14. I was really 'invested' in a September rate hike. /s

Mon, 08/31/2015 - 08:42 | 6489660 Niall Of The Ni...
Niall Of The Nine Hostages's picture

They would hike if they thought for a moment the wages of Americans who work for a living and believe in a God that isn't money might start rising again. Can't have the proles making enough to raise a family on again.

Thanks to the hard work of our masters over the last 35 years or so, that's about as likely as our finding out who killed Vince Foster during the lifetime of the couple who actually gave the order.

Mon, 08/31/2015 - 08:44 | 6489664 fromthinair
fromthinair's picture

ZH, what to you say? hike or no hike? I don't know because I don't fudge the numbers.

 

As far as I am concerned, the Greek Saga gave a confirmation for The Plan B. I can't call it official yet unless the FED hikes the rates.

The Plan B is Their assets and your labor: together we go to the utopialand.

Note: Citi has no business telling the truth. Its a joke on jokes.

http://just-a-thought-from-thinair.blogspot.com/

Mon, 08/31/2015 - 08:49 | 6489675 SMC
SMC's picture

-10%... LOL!  Even with a continuation of ZIRP, possibly NIRP, combined with QE X,X+1,X+2, etc… they may dip and bump to all time highs in diluted fiat trash but overall the effective valuation against a 1980 baseline will more like -50%. 

“Insanity: doing the same thing over and over again and expecting different results.”  - Albert Einstein.

Mon, 08/31/2015 - 08:56 | 6489701 Seal
Seal's picture

The central banks are hostesses to the market not hostages. 

Mon, 08/31/2015 - 09:39 | 6489849 22winmag
22winmag's picture

The effort to avoid a 10% correction is Titanic... almost as Titanic as the effort to keep gold and silver down. 

Mon, 08/31/2015 - 09:44 | 6489870 boom goes the d...
boom goes the dynamite's picture

Nothing like no context, -10% from here or are we here?

Mon, 08/31/2015 - 09:58 | 6489907 Labyrinth
Labyrinth's picture

Has someone done the research on the impact a rate increase will have on the banks? I thought banks are lending significantly less to each other, and instead are parking excess funds at the Fed. Doesn't the capitalization of the banking system impact the impact of rate hikes? If the primary mechanism for a rate increase is the IOER rate, might an increase actually result in more profits for banks without actually tightening lending? 

Mon, 08/31/2015 - 10:17 | 6490010 Shibumi2
Shibumi2's picture

Dude...the narrative is already out there...Ol' Yeller...Ol' Yellen

In Ol' Yeller,the dog is rabid and paw puts a slug in its brain while timmy shreaks in horror...

NO PAW!

So PAW has to be the FOMC

Timmy is either Tim Geitner (always was the sensitive type)...the US consumer....or maybe CHINA...(NO PRAW)

The question is...Is Ol' YELLER the equity OR bond market...

Enquiring minds want to know

 

Mon, 08/31/2015 - 10:20 | 6490024 grove300
grove300's picture

When anyone says that a 1/4 of 1 % increase in interest rate increase is hurting, spooking, is having a negative impact on the markets.... The are full of shit.  If that was really the case lower student loan rates to a negative percentage rate or credit card interest reduced to the same ZRIP.  That would greatly help the middle class. How about unilaterial interest rate reduction on existing home loans.  It's all about them and there needs... Sounds just like the wife, but I live 648 miles away from her so I don't have to listen to her shit and i've insulated myself from these assholes too.

Mon, 08/31/2015 - 11:08 | 6490194 Clowns on Acid
Clowns on Acid's picture

Feckin' Kabuki theater. The Fed will raise 1/4 %, and then just have Belgium bid for USTs. No public announcement of QE 4, until it gets really serious and they have to lie.

We have been thru this immoral theft practice for 6 years. The only real questions are when does the Fed get audited and when does Glass Steagal come back into effect.

Mon, 08/31/2015 - 11:32 | 6490323 polo007
polo007's picture

http://www.bloomberg.com/news/articles/2015-08-31/s-p-500-rout-has-room-...

S&P Rout Has Room to Go If Bond Spreads Have Anything to Say

by Lu Wang

August 31, 2015 — 12:00 AM EDTUpdated on August 31, 2015 — 10:41 AM EDT

- Similar credit stress led to two recessions, three corrections

- More losses may be in store for stocks if history is any guide

Credit markets foretold the selloff in U.S. equities. Should they also prove prescient in calling its extent, stock bulls have more to worry about.

In the three times when the extra yield bond investors demand over Treasuries has climbed as much as it has since May, the Standard & Poor’s 500 Index has lost an average of 18 percent, according to data compiled by Bloomberg since 1996 that excludes recession years. At its lowest level last week, the benchmark gauge for American equities was down 12 percent from its May peak.

Although the relationship doesn’t always hold, equity investors have been glued to the credit market after its signals foreshadowed the worst stretch for American stocks since the turmoil in 2011 when the U.S. lost its AAA rating at S&P. The widening in bond spreads that began as equities sat at records is now viewed as something that should have been heeded, a sign that a surging dollar and turmoil in China would one day take a toll in the U.S.

“The credit widening has been a fear signal. The market took it and finally began to sell off,” said Brent Schutte, senior investment strategist at BMO Global Asset Management in Chicago, which manages $250 billion. “There are nervous investors out there who have ridden the market for five years and have been skeptical. Now that they’re seeing this, they may be selling.”

Credit spreads continued to widen in the runup to this month’s stock rout, with the extra yield over Treasuries climbing 12 basis points to 170 since the start of August. Equity investors gave in on Aug. 18, pushing the S&P 500 into a descent that lopped more than $2 trillion of its value at the lowest level.

The benchmark index fell 0.5 percent Monday at 10:41 a.m. in New York, extending its August decline to 6.2 percent, on course for the worst month since 2012.

Now the bull market that at one point lifted stock prices more than 200 percent since 2009 is facing one of its biggest challenges to date. Into concerns about stagnant profit growth and stretched valuations has crashed China, pulling the U.S. market into its first 10 percent correction in almost four years.

“You have slow growth in the global economy, and you’ve got real issues in China and the commodity markets,” said Martin Sass, founder of New York-based M.D. Sass, which oversees $7.5 billion. “It’s a caution sign that the equity market had ignored the widening spreads. And then when they woke up to that, investors got very emotional.”

Yield premiums on investment-grade debt have widened by 32 basis points over the past three months, according to Bank of America Merrill Lynch index data. Since 1996, there have been five occasions when credit spreads showed similar expansions. Two of them preceded recessions in 2001 and 2007 when stocks went on to drop 50 percent or more.

In the other three instances, the S&P 500 fell at least 16 percent while the economy continued to grow. The latest was in August 2011, when the S&P 500 was mired in a 19 percent retreat that almost ended the bull market.

Assuming the U.S. economy will be able to avoid a recession this year, as predicted by economists surveyed by Bloomberg, and stocks fall by the average magnitude to reflect similar credit stress in the past, the S&P 500 would hit 1,742, a 18 percent decline from its all-time high reached in May. That level, last seen in February 2014, represents a 12 percent drop from its Friday close.

This month’s selloff has come as reports show the U.S. economy expanding. Gross domestic product rose at a 3.7 percent annualized rate in the second quarter, more than previously forecast, the Commerce Department said Thursday. Data last week also showed consumer spending and personal income climbed and new home sales rebounded.

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